I own a carpet cleaning business with no employees and no partners. From 2007 to 2012, I was incorporated but dissolved the corporation at the end of 2012. I operated as a sole proprietor in 2013. The only thing that changed in my business between 2012 and 2013 was the legal structure. Between 2007 and 2012, I fully depreciated my van and all of my equipment. Can I begin depreciating my van and all my equipment in 2013 as a sole proprietor?

ANSWER

The BIDaWIZ Team's Answer:

The short answer is that it depends whether or not you purchased the assets from the corporation as part of the dissolution. If that was the case, then you can begin to depreciate these assets with the fair market value as the starting point. Also, was this an S Corporation or a C Corporation? If it's an S Corporation, upon liquidation, the assets are treated as if they are sold to you at the fair market value in exchange for your stock. So if the corporation has zero basis in these assets because they are fully depreciated, then a gain was recognized that is equal to the FMV of each asset, taxed as depreciation recapture (ordinary income) on the S corporations final return. This gain then flows through to your K-1. The gain also increases your basis in the S corp, which produced a capital gain or loss when the corporation was liquidated. As a new sole proprietor, you would get a basis in each asset equal to its FMV, since you effectively purchased the assets from the S corp at their FMV. You can then be depreciated those assets at their FMV on the sole proprietorship return. This is referenced in IRC Section 331 and IRS Publication 542.